BILL ANALYSIS                                                                                                                                                                                                    



SENATE RULES COMMITTEE                           AB 1807  
Office of Senate Floor Analyses
1020 N Street, Suite 524
(916) 445-6614         Fax: (916) 327-4478
                                                              
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                        THIRD READING
                                                              
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Bill No:  AB 1807
Author:   Takasugi (R)
Amended:  6/22/98 in Senate
Vote:     27 - Urgency
                                                              
                                                             
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  SENATE REVENUE & TAXATION COMMITTEE  :  5-0, 6/17/98
AYES:  Alpert, Hurtt, Karnette, Knight, McPherson
NOT VOTING:  Burton, Greene, Kopp

  ASSEMBLY FLOOR  :  73-0, 5/27/98 - See last page for vote
                                                              
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SUBJECT  :    Property tax:  airline property and possessory  
interests

  SOURCE  :     Author
                                                              
                                                          .

DIGEST  :    This bill codifies a county/industry settlement  
agreement relating to aircraft valuation and airport  
possessory interests.

This bill is contingent on passage and enactment of AB 2318  
(Knox).

  ANALYSIS  :    Existing law provides for the valuation of  
aircraft.  However, the actual methodology for valuation  
has been left to local assessors.  A committee of the  
Assessors' Association meets annually to recommend methods  
for valuing aircraft.  However, these valuation standards  
are advisory, and actual valuation is in the hands of  
individual county assessors.

Existing statute and Board of Equalization regulation  





precludes assessing airline use of public airport runways  
and taxiways.  But court cases confirm assessors'  
responsibility to assess these possessory interests.

As these issues have been particularly contentious, they  
are associated with years of expensive litigation of  
uncertain outcome.

This bill is one of three bills that would codify an  
agreement between county assessors and airlines with  
respect to valuation of aircraft and valuation of  
possessory interests in airport landing facilities for  
property tax purposes.

This bill provides that if aircraft are valued according to  
the method agreed to in the settlement, those values shall  
be presumed to be correct (i.e., anyone challenging the  
value will be obliged to prove it erroneous).  The value  
standard would be based on the taxpayer's original cost for  
the aircraft, with various adjustments.

The original cost is to be the greater of the following:  

1.Taxpayer's cost for that individual aircraft reported in  
  accordance with generally accepted accounting principles,  
  so long as that produces net acquisition cost, and to the  
  extent not included in the taxpayer's cost,  
  transportation costs and capitalized interest and the  
  cost of any capital addition or modification made before  
  a transaction described in clause (2) below.

2.The cost established in a sale/leaseback or assignment of  
  purchase rights transaction for that individual aircraft  
  that transfers the benefits and burdens of ownership to  
  the lessor for United States federal income tax purposes.  
   

If the original cost for leased aircraft cannot be  
determined from information reasonably available to the  
taxpayer, original cost may be determined by reference to  
the "average new prices" column of the Airliner Price Guide  
for that model, series, and year of manufacture of  
aircraft.  If information is not available in the "average  
new prices" column for that model, series, and year, the  
original cost may be determined using the best indicator of  
original cost plus all conversion costs incurred for that  
aircraft.  In the event of a merger, bankruptcy, or change  
in accounting methods by the reporting airline, there shall  
be a rebuttable presumption that the cost of the individual  
aircraft and the acquisition date reported by the acquired  





company if available, or the cost reported prior to the  
change in accounting method is the original cost and the  
applicable acquisition date.  

Original cost, plus the cost of any capital additions or  
modifications not otherwise included in the original cost,  
shall be adjusted from the date of the acquisition of the  
aircraft to the lien date using the producer price index  
for aircraft and a 16-year straight-line percent good table  
starting from the delivery date of the aircraft to the  
current owner  or, in the case of a sale/leaseback or  
assignment of purchase rights transaction, as described in  
this section, the current operator  with a minimum combined  
factor of 25 percent, unless this adjustment results in a  
value less than the minimum value for that aircraft  
computed to the paragraph below, in which case the minimum  
value may be used.  If original cost is determined by  
reference to the Airliner Price Guide "average new prices"  
column, the adjustments required by this paragraph shall be  
made by setting the acquisition date of the aircraft to be  
the date of the aircraft's manufacture.  

For certificated aircraft of a model and series that has  
been in revenue service for eight or more years, the  
minimum value shall not exceed the average of the used  
aircraft prices shown in columns other than the "average  
new prices" column for used aircraft of the oldest aircraft  
for that model and series in the Airliner Price Guide most  
recently published as of the lien date.  Minimum values  
shall not be utilized for certificated aircraft of a model  
and series that has been in revenue service for less than  
eight years. 

For out-of-production aircraft that were recommended to be  
valued by a market approach for 1998 by the California  
Assessors' Association, assessments will be based at the  
lower of the following:

 (a) The values established by the Association for the 1998  
    lien date.

 (b) The average of the used aircraft prices shown in the  
    columns other than the "average new prices" column for  
    used aircraft of the five oldest years for the aircraft  
    model and series or that lesser time for which data is  
    available in the Airliner Price Guide.

In computing assessed value, the assessor may allow for  
extraordinary obsolescence if supported by market evidence  
and the taxpayer may challenge the assessment for failure  





to do so.  To constitute market evidence of extraordinary  
obsolescence and to permit an assessment appeal, the  
evidence must show that the functional and or economic  
obsolescence is in excess of 10 percent of the value for  
the aircraft model and series otherwise established  
pursuant to the above formula.

Specifies if the Airliner Price Guide ceases to be  
published or the format significantly changes, a guide or  
adjustment agreed to by the airlines and the taxing  
counties shall be substituted.

In order to calculate the above values, the taxpayer is, to  
the extent information is reasonably available to the  
taxpayer, to furnish the county assessor with an annual  
property statement that includes the original costs as  
defined above.  In the event the air carrier that has this  
information reasonably available to it fails to report  
original costs and additions, as requested by law, an  
assessor may in that case make an appropriate assessment  
pursuant to Revenue and Taxation Code Section 501.

The bill also contains a county-by-county table of credits  
against future tax.  The credits would range from $18.3  
million for Los Angeles, $13.5 million for San Mateo, and  
$4.5 million for Alameda, down to $500 for Humboldt County.  
 These credit amounts are the amounts that each of the  
counties has agreed to accept as its settlement amount, in  
order "to dispose of certain lawsuits and assessment  
appeals that have been filed, and to preclude the filing of  
other claims relating to (1) the assessment, equalization,  
and accessibility of certain possessory interests in  
publicly owned airports and (2) aircraft valuation and  
equalization" by 13 named airlines.  The credits would be  
spread equally over the 1998-99 through 2002-03 fiscal  
years.

The following are the counties affected by the bill  
containing the credits against future tax:

Alameda ...............................   $ 4,455,110
Contra Costa ........................             1,000
El Dorado ............................              1,000
Fresno ..................................          264,630
Humboldt .............................                 500
Kern .....................................             
33,540
Los Angeles .........................     18,335,720
Monterey ..............................         148,560
Orange ..................................      2,916,995





Riverside ...............................        435,780
Sacramento ............................    1,070,185
San Bernardino ......................      ,991,405
San Diego ..............................    4,262,610
San Joaquin ...........................           1,000
San Mateo .............................   13,544,005
Santa Barbara ........................        167,880
Santa Clara ............................    2,369,080
Solano ....................................           1,000

The 13 airline companies mentioned in the bill are as  
follows:

Alaskan Airlines Inc.
American Airlines, Inc.
Continental Airlines, Inc.
Delta Airlines, Inc.
Federal Express Corporations
Northwest Airlines, Inc.
Trans World Airlines, Inc.
United Airlines, Inc.
United Parcel Service
U.S. Airways, Inc.
Wings West Airlines
Southwest Airlines
America West Airlines

Then bill specifies that with respect to America West  
Airlines only, the waiver or settlement agreement requested  
by the bill may exclude the claims that American West  
Airlines has already raised in the adversary proceedings in  
the bankruptcy proceedings entitled "In Re America West  
Airlines, Inc., Case No. 91-07505 PHX-RGM" against the  
Counties of Orange, San Bernardino, Sacramento, San Mateo,  
Alameda, and San Diego, provided that the settlement  
agreements or waivers provide that the resolution of any of  
America West's adversary claims will have no legal effect  
for any tax year not at issue in those adversary  
proceedings.

States the intent of the Legislature that this bill is to  
facilitate recordation of the disputes over the assessment  
of certificated aircraft by codifying recommendations  
produced by a county and airline industry working group,  
that do all of the following:

1.Establish valuation methodology for certificated  
  aircraft.

2.Clearly establish a presumption of correctness of county  





  assessors follow the assessment methodology set out in  
  this measure and in AB 2318.

3.Dispose of certain outstanding litigation and appeals  
  over aircraft valuation.

4.Mitigate the financial impact of the statutory charge on  
  local governments and schools by establishing a method by  
  which the issuance of any prior years refunds to  
  litigating airlines would be treated as credits against  
  future tax payments.

States AB 1807 is to become operative only if AB 2318 is  
enacted and becomes effective on or before January 1, 1999,  
and in that event is to become operative on the date of the  
effective date of the bill and the effective date of AB  
2318.

  Three-Bill Package  

AB 1807 (Takasugi) and AB 2318 (Knox) are products of  
lengthy negotiations between counties and the airline  
industry over the valuation of airline real property  
interests in publicly-owned airports (possessory interests)  
and airline personal property aircraft.  Those bills codify  
the recommendations of a county/airline industry working  
group.  Jointly, these measures establish valuation  
methodology for these possessory interests and personal  
property which are presumed correct.  In addition, they  
dispose of outstanding lawsuits and assessment appeals  
estimated at nearly $250 million.  In exchange for  
dismissal of pending lawsuits and assessment appeals, the  
affected counties will allow up to $50 million in credits  
against the future airline industry property tax  
liabilities.  The $50 million is made available in five  
equal annual installments of $10 million each industry in  
fiscal year 1998-99.  Los Angeles County anticipates that  
normal growth in airline industry values and the valuation  
methodology set forth in the bills will provide revenue  
increases that will more than offset the credits to be  
provided in future years as a result of these measures.

SB 30 (Kopp) allows a county or city to enter into a  
settlement with a taxpayer to substitute credits against  
future tax liabilities.

  FISCAL EFFECT  :   Appropriation:  No   Fiscal Com.:  No    
Local:  No

This bill is part of a legislative package that would  





codify a settlement agreement between counties and airlines  
regarding litigation and appeals of various assessments of  
aircraft and real property rights at airports.

Many court cases and assessment appeals regarding the  
airline industry are currently outstanding.  In aggregate,  
they involve millions of dollars in property tax for past,  
current, and future tax years.  The large amount of tax  
revenue involved is evidenced by the $50 million in credits  
against future taxes which is specified in this bill.

The actual revenue effect of the settlement package is  
indeterminate, since the eventual outcome of the pending  
litigation and appeals, if carried to conclusion, cannot be  
known.  That is, the $50 million specified in the bill is  
probably substantially less than the amount of county  
losses should all current litigation be pursued.

  SUPPORT  :   (Verified  6/24/98)

Los Angeles County
San Mateo County
Johan Klehs, State Board of Equalization member

  ARGUMENTS IN SUPPORT  :    The bill and its companions, SB 30  
(Kopp) and AB 2318 (Knox), reflect a settlement package  
agreed to by 18 counties and 13 airlines, relating to  
valuation of commercial aircraft, and to the taxability of  
possessory interests in various airport facilities.  These  
are issues over which the counties and airlines have feuded  
for many years, with neither side having confidence that  
its view will prevail should litigation go to conclusion.

In the face of such uncertainty, and with little desire to  
spend the rest of their careers in court, the opposing  
parties have negotiated a broad agreement, including  
valuation standards which are agreed upon, and a schedule  
of credits against future tax.  This is probably the most  
efficient way of resolving an essentially intractable  
problem.















  ASSEMBLY FLOOR  :
AYES:  Ackerman, Aguiar, Alby, Alquist, Aroner, Ashburn,  
  Baca, Baldwin, Battin, Baugh, Bordonaro, Bowen, Bowler,  
  Campbell, Cardoza, Cedillo, Cunneen, Davis, Ducheny,  
  Escutia, Figueroa, Firestone, Frusetta, Gallegos,  
  Granlund, Havice, Hertzberg, Honda, House, Kaloogian,  
  Keeley, Knox, Kuehl, Kuykendall, Leach, Lempert, Leonard,  
  Machado, Margett, Martinez, Mazzoni, McClintock, Migden,  
  Miller, Morrissey, Morrow, Murray, Olberg, Oller, Ortiz,  
  Pacheco, Papan, Perata, Poochigian, Prenter, Pringle,  
  Richter, Runner, Scott, Shelley, Strom-Martin, Sweeney,  
  Takasugi, Thompson, Thomson, Torlakson, Vincent,  
  Washington, Wayne, Wildman, Woods, Wright, Villaraigosa
NOT VOTING:  Brewer, Brown, Bustamante, Cardenas, Floyd,  
  Goldsmith, Napolitano

DLW:sl  6/24/98  Senate Floor Analyses
              SUPPORT/OPPOSITION:  SEE ABOVE
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